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Dalio Says End of SALT Deduction Will Further Divide Nation

(Bloomberg) -- Billionaire Ray Dalio said the expected elimination of state and local income-tax deductibility proposed by lawmakers will take a toll on high-tax areas due to lower revenues as high-income earners move out of state.

That’s going to exacerbate the polarity and conflict that’s already prevalent among wealthy and lower-income U.S. taxpayers, who have “typically different values.” The proposed tax incentives will push the rich toward states with lower levies, like Florida, Texas, Nevada, Washington and Arizona, he wrote in a LinkedIn post Tuesday.

Those left behind in high-tax states will see a hit in their property values, while “the reduced population of higher income and higher spending folks leads to reduced spending in these locations,” further depressing their economies, said Dalio, who runs the world’s biggest hedge fund at Bridgewater Associates. The firm is based in Connecticut, one of the high-tax states cited in the post.

The House and Senate are poised to begin working this week on compromise tax-overhaul legislation. The Senate bill mirrors the House legislation by calling for the repeal of state and local tax deductions, while allowing up to $10,000 for property tax deductions. According to a study by the Tax Policy Center, 7 percent of taxpayers would pay more tax in 2019, 10 percent in 2025, and 48 percent in 2027, compared to current law. On average in 2027, taxes would change little for lower- and middle-income groups and decrease for higher-income groups.

Tax Revenues

On its face, ending so-called SALT deductibility will increase the effective tax rate for high earners in high-tax states by 3 percent to 5 percent, with 1 percent to 2.5 percent of them migrating out of state, he said. State tax revenues will fall about 1 percent, Dalio said. His estimates understate the overall impact from the changes as they don’t account for consequences on real-estate prices and living conditions, he said.

States like New York, New Jersey and California, which have higher than average incomes and taxes, are the most vulnerable -- especially because of the concentration of wealth among high-income earners. For example, more than 30 percent of the taxes in New York, New Jersey, and California come from those making $500,000 or more, and in those states, high-earning taxpayers are a small portion of the population, according to the post.

“That means that it would take only a tiny percentage of the population to move to have a devastating effect on the state’s finances,” he said. “To the extent they do move, it would increasingly lead to more prosperous states that are occupied by, and cater to, more rich people and more depressed states that are occupied by, and cater to, more poor people, and increased polarity between them.”

Already, the existing disparity in local taxes has pushed several wealthy individuals to bolt for cheaper pastures. Billionaire Paul Tudor Jones of Tudor Investment Corp. left Connecticut for Florida in 2016. David Tepper, who heads Appaloosa Management, left New Jersey in 2015 for the Sunshine state, which doesn’t have personal-income and estate taxes. In 2016, he moved his firm.

The threat of departure by such high-income generating individuals and businesses can wield significant influence over states undergoing budget considerations. Indeed, Dalio’s Bridgewater -- which oversees $160 billion -- received $22 million in aid from cash-strapped Connecticut last year after other states began vying as an alternative location for the firm’s campus.

“On the margin, the tax law changes are going to be significant and bad for high SALT locations and good for low SALT locations,” he wrote. They “are going to be good for businesses and business owners (and hopefully those who the money trickles down to), so those businesses in low SALT states will get a double whammy benefit.”